Strategy Playbook for Overcoming Sanctions — the Huawei Ban
Mission
In May 2019[1] the United States government designated Huawei — the telecommunications giant — a risk to national security and restricted the Chinese company from doing business in the U.S. What became known as the ‘Huawei Ban’ ban was later extended to restrict anyone, anywhere from selling Huawei anything that had been designed or made with U.S. technology. This cut Huawei off from using Google Mobile Services[2] and restricted functionality of the Android Operating System, used on all Huawei’s mobile devices, which accounted for 55% of their total revenues. Worse still Huawei was now threatened with being cut off from the crucial chipsets all digital devices rely on.
Huawei’s CEO estimated the ban would mean that the company would take a $30 billion hit in the first two years alone[3] and they were now in a “life or death” battle. To survive Huawei would need a “war-like strategy”[4] to survive. In this latest of our ‘Second Opinion’[5] series we will look at the strategy Huawei deployed and seek out insights other companies — those also finding themselves in the sanctions cross-hairs — can use as a guide through troubled waters.
Huawei’s Moves
Where the Western approach to strategy attempts to deliver victory by bringing down the full weight of one’s forces against a decisive point, the Eastern approach to strategy focuses more on identifying and executing multiple, simultaneous moves quickly[6]. This is the approach Huawei took.
Map 1 — Huawei’s Strategic Moves (high-level)
1. Attacking Moves (Directed Investments)
A) Huawei’s first move was to identify attractive markets that would still be open to its products. Since 2014 sales in Russia (Europe’s largest consumer market) had been growing annually at over 50%. Furthermore, Russian consumers don’t rely on Google Mobile Services (GMS) as Yandex — Europe’s biggest tech company with its own suite of voice, maps, ride-hailing, music and news apps — is Russian. This meant that being cut off from GMS would not be a deal breaker for locals.
B) Russia also offered Huawei a value added extra — an unenviable talent base in advanced maths, science and engineering making the country a great place to “source components and software, develop new technologies, and attract high-quality talent”.[7] Huawei had long been cultivating partnerships with Russian universities and research institutes — especially those focused on AI/machine learning, neural networks, and data storage — and even set up their own OpenLab in Moscow. But now, as partnerships with elite American universities were severed and those in other western countries came under pressure, Huawei re-directed $100 billion in R&D funding to Russia, significantly extended its R&D facilities in the country, tripled their staff and trained 50,000 new Russian technical experts.[8] Huawei was mobilising forces to make the second of its key moves — developing viable alternatives to both GMS and the Android OS (Operating System).
2. Ecosystem Moves (Alliances)
A) Industry experts would have considered anyone trying to create a rival to the Android OS and GMS as being on a fool’s errand, but Huawei simply had no choice. However, they didn’t try to do this from scratch. Instead they moved to incorporate Aurora (a Russian OS developed by Rostelecom, a state-owned carrier) onto their devices. Then, as part of a large scale field test, they supplied the government with 360,000 Huawei tablets pre-installed with the new OS for use in the country’s census — announcing Huawei as a genuine alternative to established global players on the Russian market. Importantly Aurora, (like Android) was developed on the open source Linux platform meaning Huawei — with a supporting cast of thousands of highly-qualified and specially-trained Russian engineers — could rapidly develop and deploy its own operating system.
B) Just two years into the ‘Huawei Ban’ the company launched their own alternative to Android — Harmony OS. But to be useful to end users mobile devices need apps. Cut off from GMS (Gmail, Chrome, Maps) and the Play Store meant Huawei had to develop alternatives. They moved quickly to incorporate Yandex’s extensive suite of apps, (including a voice assistant, Celia) and worked with other leading Russian companies (such as those providing popular local alternatives to Facebook (VK) and other widely successful tech companies, like Wildberries and Ozon) to make their Android apps compatible with Huawei’s new Harmony OS. But it was Yandex that was he key partner.
C) Together China’s leading Telecoms company and Europe’s largest tech company developed the Huawei Map Kit, which helped unlock the holy grail for smartphone companies — convincing a vibrant ecosystem of independent developers to build apps for your OS. The Map Kit allowed developers to create apps using Huawei’s mapping and location capabilities and this — along with millions in incentives — activated the thousands of developers in research institutes and universities that Huawei had been building relationships with. The result was Huawei’s ‘App Gallery’ (a rival to Google’s Play Store with specific regional and language apps) and’ Huawei’s Mobile Services’ (an alternative to Google Mobile Services), which had reached 730 million users by 2021.
3. Positional Moves (Land Grab)
A) Huawei had already been investing in Russia’s science and technology base but now moved deeper with a series of more corporate partnerships and acquisitions: A joint venture with Rostec — a state-owned enterprise focused on advanced technology — enabled Huawei to expand its manufacturing and production of smartphones and tablets at a new assembly plant in the Moscow region; they teamed up with Sber (the country’s largest bank now re-positioning itself as a tech company) to launch a cloud platform in an attempt to gain ground in country’s large, and rapidly growing cloud computing market; and Huawei bundled services with Kasperksy (a globally recognised cyber security firm) to provide security solutions for the cloud both in China and Russia.
B) Huawei, in a deal worth $50 billion, also acquired video surveillance and facial recognition technology patents and the team from a Russian startup — Vocord. While a major partnership with MTS — Russia’s leading telecommunications provider — saw Huawei launch the first 5G test zone in Moscow. Although this was not the first 5G test zone in Russia (and Huawei is not the only provider of such network equipment in Russia) this move made Huawei a player in the competitive Russian 5G equipment market. If they can learn how to out-compete their rivals here and be the ‘last-man standing’ they are in a prime position to take a model of entering and dominating the 5G infrastructure of large developing economies worldwide.
4. Defensive Move (Sale)
Despite the ban Huawei managed to (briefly) surpass its Korean competitor, (Samsung) to become the world’s top smartphone maker. But restrictions on chipsets was the killer. Unlike most other players in the market Huawei designed its own chipsets but had to outsource their manufacturing to TSMC. At first the Taiwanese company assured Huawei it would continue to produce their chipsets, but this promise was soon broken as most chipsets are manufactured using US equipment. Huawei was now left without future access to this critical component. Therefore they sold a smartphone sub-brand, (Honor) to another Chinese company, (Shenzhen Zhixin New Information Technology Co)[9] to break their formal link. Honor, now free from sanctions, launched its first ‘post-Huawei’ phone in early 2021, which was focused on the Chinese market. But the following year launched its Magic 4 series, which included GMS — making it a global competitor.
However, the Huawei Ban continues to spread and (at the time of writing) included more than 1,000 Chinese companies in an non-transparent attempt to hinder China’s global digital competitiveness. This has left many companies around the world wondering: “Are we going to be sanctioned next?” So, what has the above map and discussion enabled us to learn from Huawei’s moves?
Strategic Insights
Huawei could have retreated into its massive domestic market where the US ban was irrelevant (as Chinese customers don’t use GMS) but they saw themselves as a global player. Therefore, they aggressively raised their direct investment in an established market by re-directing resources from markets where Huawei would soon be ‘also rans’. Investment was directed into highly-qualified people and they worked collaboratively to turn ideas into technology Huawei needed to survive and thrive. The result of their attacking investments into the right market, people and ideas was not only the rapid development of viable, alternative technologies but also the creation of a model for scaling up in large developing economies that Huawei can deploy globally.
Huawei also needed to completely rethink their approach to sourcing the technology their mobile devices need but they avoided the mistake of attempting to build everything themselves. They utilised the power of open source by building its new OS on the open Linux platform and focused instead on stimulating an ecosystem of developers to act as a massive, out-sourced innovation team. If they had tried to go it alone Huawei’s progress would have been slow and even more expensive in the long-run as their propriety technology would have made partners pause to consider (quite legitimately) whether they were getting locked in to a new technology standard they didn’t need. But, by using ‘open technology’ instead, Huawei avoided developers’ lock-in concerns and were able to cultivate an active community of international developers creating ever more apps for its Gallery. They are now starting to enjoy positive network effects (the value of their technology increases as more users join) not just in China, but internationally as well — where they want to play.
Huawei also sought to capture future market spaces. They entered the highly-competitive Russian cloud market and will sharpen their gameplay there over the coming years, whilst avoiding direct competition with the American behemoths, (like AWS). But it’s in 5G that Huawei is looking to dominate future real estate. Locked out of Western markets (due to fears raised about security) Huawei is looking to also dominate Russia’s advanced 5G market. If they can out-compete rivals here they will have a compelling proposition to offer other developing countries who wish to make a large leap into the technological future with a leading utility supplier. The ‘Huawei Ban’ may have cut the Chinese technology behemoth off from the West but it has led the deepening of Sino-Russian science and technology partnerships. This is enabling Huawei to adapt and develop new propositions by attacking markets, building alliances, making land grabs and strategic divestments. And, like another famous large company from the East who innovated their way out of crisis when their core market crashed,[10] this approach to strategy — focusing simultaneously on multiple wheres in order to uncover new sources of value — has enabled Huawei to not only survive a “life or death battle” but, as we’ll see below, to start thriving as well.
Huawei’s Future Moves
The Economist reported that Huawei had “run out of stock of its specialist chips in early 2021 and [would] have to scramble to find an alternative [which would] be cumbersome and costly”.[11] This would kill its ability to compete in the mobile device industry. But, as we saw above, Huawei is focusing instead on 5G, cloud and also the Internet of Things (IoT) — technologies that do not require the most advanced chipsets. This is why, despite the dire predictions, Huawei returned to the global stage in March 2023 as the biggest exhibitor at the Mobile World Congress in Barcelona.[12] Huawei had to work around multiple U.S. Trade sanctions and get through three years of COVID restrictions that had hindered its global ambitions, but now they are back, with cloud services and 5G technologies and are “set on wooing customers from Europe, Latin America, Africa and other Asian countries — in other words, anywhere but the U.S.”.
Pivoting from their massively popular mobile devices to cloud services and 5G communications for corporate clients is the ‘new normal’ for Huawei — if the world deals you lemons, make lemonade.[13] Huawei still has a long way to go to play catch up in the cloud, especially against the leading U.S. Players, but the Chinese are positioning themselves as the default alternative for large economies under the threat of sanctions. But in 5G Huawei is now the global leader. They have moved from merely selling 5G base stations to telecom carriers into a newer, growth market of using 5G technology to help companies go digital and “the opportunities in B2B are significantly larger than the B2C stuff”. For example, Huawei has set up a mining business group dedicated to using 5G technologies to automate mines meaning they are differentiating their offerings around the services they provide making it increasingly difficult for others to compete on the technology itself, which is increasingly an invisible enabling component end users care little about.
Going forward “Latin America and Africa will be key markets” for Huawei as they look to leverage their experiences in a non-western economy like Russia’s. But it’s Huawei’s dominance in 5G and IoT that will enable the company to also occupy the key future landscape of ‘smart cities’ — a destination many cities globally are striving for. There is move around the world to designing cities with technological components that can help solve the problems of residents. Those cities in the Global South, with few legacy investments can jump straight to the next horizon — like Kenya did with smartphones.[14] This looks like a major move for Huawei going forward.[15]
Perhaps the most intriguing path in Huawei’s future though is connected to those dire predictions from the likes of the Economist about China being cut off from the most advanced chipsets and needing to scramble to find alternatives, which would take a long time. Recently, some reports suggest that China has already “figured out how to make 7nm [advanced] chips”[16] — and may have done so as early as 2021 — and they’re well on the way to achieving a ““true 7nm process” that includes both scaled logic and memory bitcells”. Some are even expecting developments in 5nm chips by 2024–5.[17] China is also now “leading the world in building new chip factories, a step toward achieving more self-sufficiency in semiconductors that could eventually make some buyers reliant on China for many of the basic chips now in short supply.”[18] This suggests Huawei with soon be immune from crippling effects of US sanctions.
Not only did Huawei pivot into 5G and cloud, which has opened up options for it in the areas of smart cities and digitally-transformed organisations, but they have not closed the door to re-entering the mobile device market either. With Honor able to access advanced chipsets and able to run on either Android or Harmony OS, using either Google Mobile Services and the Play Store or Huawei’s Mobile Services and App Gallery there is little to prevent them going after their share of the global market. As the U.S. government continues to sanction economic around the world there is likely to be more large captive (and rapidly developing) markets that could be keen on an alternative to the U.S. digital world. At this point, depending on how China wants to play the game, they could also flood the market with 14nm+ chips that their large chip foundries are producing to commoditise this segment. This would bring prices down globally and cause massive downward pressure on the share price of U.S. chip makers like Intel. Could this ultimately be Huawei’s revenge — served cold?
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1 https://www.politico.com/story/2019/05/15/trump-ban-huawei-us-1042046
2 https://www.androidauthority.com/huawei-loses-access-to-google-android-987873/
3 https://www.cnbc.com/2019/06/19/huawei-ceo-downplays-companys-expected-30-billion-revenue-miss.html
5 https://powermaps.net/services#opinion
7 https://www.cfr.org/blog/boxed-out-west-huawei-looks-russia-survive-crisis-and-emerge-stronger
9 https://www.androidauthority.com/huawei-google-android-ban-988382/
10 https://marcusguest.medium.com/surviving-collapse-in-your-core-market-the-fujifilm-case-3add3159933b
11 https://www.economist.com/leaders/2020/07/09/tiktok-and-the-sino-american-tech-split
13 https://youtu.be/NzcpZVLmhbE
14 https://www.irishtimes.com/news/world/africa/how-the-mobile-phone-changed-kenya-1.2646968
15 https://sputniknews.cn/20200703/1031741998.html
16 https://www.theregister.com/2022/07/22/china_smic_7nm_chips/
18 https://www.wsj.com/articles/china-bets-big-on-basic-chips-in-self-sufficiency-push-11658660402
